History: Mercantilism and Capitalism

Tariff

A tax on certain types of imports or exports

Mercantilism

An economic practice that was dominant in Western Europe during the 15th to the mid-18th centuries

Capitalism

An economic system based on private ownership of the means of production and their operation for profit

1. Before the book" countries declared their wealth based on the value of their gold and silver deposits. Through Smith's influence, countries began to think about their wealth in terms of their levels of production and commerce. (Gross Domestic Product-GDP, an indicator of a country's economic health). 2. A "free exchange" should be created. Decreased tariffs and less regulations --> Increased imports and exports 3. Less government interfere in trade. No tariffs, other taxes, or regulations. (Smith did see the government responsible for some sectors such as education and defense.)

How did Adam Smith's book change the way people in the 19th century thought about trade and money?

1. Wealth is a win-win thing (not fixed). Wealth can grow, and money can be MADE. Everyone can be rich. 2. Every individual, by doing what is good for himself, inadvertently creates the best outcome for all. (enterpreneur creates a new product and hire more workers to work for him) 3. "Division of labor" and "specialization" create wealth.

How did Adam Smith's ideas differ from those of mercantilism? (list 3)

1. Government has control over a nation's economy and politics. 2. Colonies were used as a way to gain wealth.

How did the theory of mercantilism achieve those 3 goals?

Other nations were viewed as threats. Nations needed a stockpile of cash on hand to pay for wars, etc. Gold and Silver = Power

In the mercantile system, how did nations view one another?

The Wealth of Nations

The book written by Adam Smith

Adam Smith

The famous economist who challenged the ideas of mercantilism

1. Imposing "high tariffs" on the importation of finished goods (expensive imported gold necklace) 2. Imposing "low or no taxes" on the importation of raw materials (cheap imported gold) 3. Imposing "low or no taxes" on the export of finished goods (cheap to export a gold necklace) 4. Imposing "high taxes" on the exportation of raw materials (expensive to export gold) 5. Seeking new markets for domestic manufactured products, so as to artificially increase the demand for domestic production (promoting a gold necklace to be worn by females, so guys would go buy it for their girls).

Under Mercantilism, how can Government control a nation's economy and politics?

1. Colonies were sources of raw materials that the home country could use to produce goods (Government can take gold from its colonies.) 2. Colonies were markets for finished products. (People in the colonies will buy gold necklaces.) 3. Navigation acts could limit the trade of colonies to the home country. (Government can create the law to limit what the colonies can sell to their home country.)

Under Mercantilism, how can Government used colonies to gain wealth?

Capital

Wealth in the form of money or assets owned by a person or organization available for a particular purpose such as starting a company or investing.

1. More gold hoarders --> Gold price goes down --> People become poorer 2. Selling goods to other countries but buying nothing back without realizing that those countries can do the same. At the end, there is no international trade.

What could be the outcome of Mercantilism?

1. Economy is a win-lose situation. One man's gain is another man's loss. (If Josh earns more money, then someone else must make less money.) 2. They don't understand the concept of Demand and Supply. If a country has too much gold (more supply with the same demand), the price of gold will go down. 3. Tariffs can protect wealth when in fact, tariffs destroy international trade, causing people to get poorer.

What did Mercantilist NOT understand about economics?

1. Slavery/Forced labor -- If labor is forced, then the system will not benefit workers. They need freedom to leave and work somewhere else. 2. Lack of incentive to act when there is no profit involved, e.g., maintain standards for clean air and water; uphold standards for safe/healthy working conditions.

What problems interfere with the benefits of capitalism?

1. To enrich and empower the nation by acquiring and retaining as much economic activity as possible within the nation's borders 2. To prioritize goods with military applications 3. To encouraged nations to be economically independent. To produce what they need and export goods to other nations to gain wealth.

What were three goals of mercantilism?